Edited version of private advice

Authorisation Number: 1051711297361

Date of advice: 06 July 2020

Ruling

Subject: Business - short-term accommodation - capital gains tax - small business concessions - active asset

Question 1:

Are you carrying on a business of providing short-term accommodation?

Answer:

No.

Question 2:

Is the Property considered to be an active asset under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

This ruling applies for the following period

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997Section 995-1

Income Tax Assessment Act 1997 Subdivision 152-A

Relevant legislative provisions

You purchased the Property after 20 September 1985 which has a land area of less than two hectares, with farm and ocean views. It is located close to areas of interest for tourists and local beaches, with nearby towns that provide good infrastructure such as supermarkets, cafes, medical facilities, golf course.

The Property was purchased as a going concern with previous owner using it for short-term accommodation.

The Property has two dwellings located on it which abut each other and consist of one unit of accommodation for the property manager (Dwelling A), and a larger unit of accommodation (Dwelling B) used for rental purposes.

The Property has been set up as farm style holiday accommodation and is registered with the local council (the Council) as being a hostel. The Property is inspected by the Council health inspector annually.

You purchased the Property to continue providing farm style accommodation and live on the Property in Dwelling A.

You commenced using Dwelling B for visitor stays shortly after you purchased the Property and reside in Dwelling A. No improvements were undertaken to the Property prior to commencing your short-term accommodation activities as the Property was in a suitable condition to be used for that purpose when you purchased it, with bookings for future visitor's stays being taken by the previous owner.

Since you purchased the Property you have undertaken the following activities:

·         Dwelling A:

-        Kitchen renovated

-        Replaced floor coverings; and

-        Window coverings were replaced.

·         Dwelling B:

-        Kitchen renovated

-        Floor coverings replace twice, with carpets put in and the flooring in the living room and kitchen being replaced with vinyl boards; and

-        Window coverings were replaced.

You advertise the Property on your own website which includes the following information:

·         Dwelling B is self-contained, with several bedrooms, complimented by a spacious garden offering a tranquil stay

·         Rates are based on a per night basis, varying according to when the stays occur, with extra

·         Minimum stay ranges from two nights to five days dependant on when the stay is booked

·         Payment via cheque, direct debit, PayPal or cash payments

·         Visitors are advised to bring bed linen, towels, their personal toiletries and food, tea, coffee and milk.

·         Linen hire is available

·         Information about activities that visitors can do on the Property, including feeding the animals on the Property; and

·         Information of sites and activities that the visitors can undertake in the area near the Property.

You update your website and upgrade the facilities provided for visitors regularly by changing photographs, descriptions, adding new attractions that may be of interest to the visitors.

You email visitors to thank them for their visit and to offer them a discount for their next stay in addition to occasionally emailing a select group of visitors offering them a discounted stay.

You have a Facebook page that assists in sourcing new visitors and encourages regular visitors to return.

You have a sign in front of the Property which provides the name of the Property, identifies that it is 'farm style accommodation' and has your mobile phone number and email address.

The Property has ongoing listings with several online platforms for which you pay fees.

You have your own terms and conditions for the visitor's stays that are provided on your website in addition to the terms and conditions provided by the platforms used to promote Dwelling B.

You provide the following in relation to the short-term accommodation visitors, which is included in the cost of their stay:

·         Furnished accommodation including

-        equipped kitchen with full size stove, refrigerator, coffee machine, microwave, crockery, cutlery, pots and pans

-        kitchen is stocked with basics such as salt and pepper, oil, spices, tea, coffee, milk and paper towels

-        washing machine

-        bedding, including covered doonas, blankets and pillows

-        cleaning products such as dishwashing liquid and washing powder

-        hand wash, shower gels, shampoo and conditioner and toilet paper

·         Firewood for heating

·         Toys and games; and

·         Television, DVD player and DVDs, and Wi-Fi.

You provide a reasonable introductory amount of tea, coffee, and milks and shampoo, conditioner and shower gels, but not personal toiletries such as toothbrushes, hairbrushes, makeup remover, deodorant, shaving implement or manicure packs.

You provide guidance to the visitors on how to light the slow combustion heater, which has occurred on every visitor stay during the ruling period. Additionally, you verbally provide the visitors with information in relation to the nearest shops/facilities, and things that are available for them to visit in the area and have brochures and maps available for the visitors. You do not charge anything for this service as it is provided to make the visitors feel welcome.

You upgrade the facilities by putting new throw rugs, cushions, new bedding and pillows, and kitchen ware. You recently had the Wi-Fi for the visitors use improved and replaced the electric blankets to keep the accommodation fresh as there is a lot of competition in the area.

You provide an optional linen hire service fee for specified amounts according to the size of the bed, which includes towel hire. Charges for bed linen hire have been made on less than 40% of the visitor's stays during the ruling period, with the amount from the fees totalling $XXX.00.

The Property is cleaned between the visitor's stay, prior to their arrival and you have never provided any additional cleaning during their stays. You launder bed linen and covers, towels and curtains.

The minimum period visitors can stay is a couple of nights, with the maximum stay of XX days. However, during the period you have owned the Property visitors have stayed for shorter than two-week periods with their stays usually only for several days, and are mostly seasonal with peak time during summer, school holidays and long weekends.

The visitors have access to the whole property, except for Dwelling A and a shed, and can use the surrounding property and garden, children's play area and barbeque.

You currently have various animals that you spend time with the visitors feeding and petting. You do not charge any fee in relation to the visitor's interaction with the animals as you consider it to be a friendly gesture and part of welcoming visitors to the country experience.

The amount the visitors are charged is based on how other properties in the other areas are charging for their stays. You have not increased the amount the visitors are charged during the ruling period.

The visitors contact you if they have any problems during their stay that you personally deal with or engage the services of a local handyman to address the issue.

You are available to visitors as you reside at the Property but only enter Dwelling B if there is a problem, or if you are invited.

When there are no visitors Dwelling B remains vacant and you enter it most days for maintenance, cleaning and airing purposes.

You estimate that you spend up to XX hours per week during the peak times and X hours during off peak times undertaking the following:

·         Several hours per day answering enquiries, taking bookings, keeping records of income and expenses, adjusting online booking calendars, invoicing, organising deposits and payments, emailing receipts and instructions, scheduling cleaners and gardeners, and organising any maintenance requirements. Additionally, you spend time showing prospective visitors who drop in around the Property

·         You spend an hour with visitors when they arrive when you show them around the Property, introducing them to the farm animals and explain how to operate things; and

·         You spend X hours per week all year undertaking activities such as maintaining the gardens and property, washing windows, cleaning barbeques, cleaning the Property, shampooing carpets, cleaning light fittings, and repainting rooms.

You engage the services of the following:

·         A cleaner to undertake basic cleaning of the bathrooms, floors, kitchen, and surfaces Dwelling B for several hours before each booking; and

·         Gardeners who spend an several hours per month on a seasonal basis, with them spending more time in Spring and less time in Winter.

You enquire about when the visitors expect to arrive at the Property when they make their booking so that you can be there to greet the visitors when they arrive and show them around the Property. On the occasions when the visitors arrive when you are not at the Property you meet them when you return and show them around the Property.

The visitors usually drop the key off to you when they leave. If the guests are checking out early, they leave the key in the door and text you that they have left.

If the visitors book through your website, or the booking is made directly with you, you invoice them for a deposit and ask them to pay the balance several days prior to their arrival. The visitors pay for their stay when they make their bookings through the other methods, with you receiving payments after the visitors have arrived.

You have a bank account to receive payments, and to make payments for expenses using a credit card and to pay the cleaners, handyman and gardeners using direct debit arrangements.

You have an online booking calendar and use a web app to invoice bookings, recording the full name of visitors, contact details, deposits received, sales, fees due and other expenses.

You have an insurance policy for the Property which covers the building, contents and legal liability of $XX,000,000.00. It identifies that the Property is used for short-term accommodation purposes.

You are not registered for Goods and Services Tax in relation to your short-term accommodation activities.

Due to Covid-19, your bookings for several months have been severely affected with enquiries restarting once the travel restrictions were lifted. You are currently leaving several days between bookings to keep the visitors safe, and to spend additional time sanitising surfaces.

During the ruling period up to the start of the last month of the ruling period you had XX stays totalling $XX,XXX.00, with a further booking prior to the end of the income year and one during the following income year.

You are over 60 years of age and are considering selling the Property and downsizing.

You estimate that the current market value of the Property is $XXX,XXX.00.

You do not have any other employment and the short-term accommodation activities are your only source of income other than interest from your savings.

Reasons for decision

Question 1

Summary

Your short-term accommodation activities are not viewed as being of the size or scale necessary to be characterised as carrying on a business of letting rental properties. Therefore, whether your activities amount to the carrying on of a business was dependant on the level of services provided to the visitors in addition to the accommodation, and if those services added value to the accommodation activities.

Taking all of the available facts into consideration, including services provided to the visitors staying at Dwelling B, and weighing the various factors it is viewed that you are not carrying on a business in relation to your short-term accommodation activities during the period covered by this ruling.

Detailed reasoning

Carrying on a business for income tax purposes

Section 995-1 of the ITAA 1997defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

Paragraph 8 of Taxation Ruling TR 2003/4 (TR 2003/4) (which is about whether boat charter activities generate business or investment income) states:

The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v. McDonald 87 ATC 4541; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property.

Paragraph 51 of TR 2003/4 states:

Beaumont J indicated (quoting Wertman v. Minister of National Revenue 64 DTC 5158) that for a business to be carried on by owners of property, one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants' occupation of the property.

These statements indicate that a person who simply owns an investment property or several investment properties, either alone or with other co-owners is usually regarded as an investor who is not carrying on a rental property business. There has to be something special about the activity to reach the conclusion that a business is being carried on. This will generally relate to the provision of additional services to the client in a manner that enhances the gross return above investment levels.

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest is also relevant for the present discussion. The ruling discusses whether rental income constitutes proceeds of business. Although the ruling refers to situations where rent was being derived, the principles also apply to other situations where accommodation is provided for reward.

The scale of operations is an important factor to consider in deciding if an individual is carrying on a business of letting property. Scale of operations refers to the number of properties, rather than the frequency of tenancy. Paragraph 5 of IT 2423 refers to the situation of an individual with rental properties and carrying on of business:

A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business.

Normally the receipt of income from the letting of property to tenants does not amount to the carrying on of a business (Federal Commissioner of Taxation v. McDonald (1987) 15 FCR 172;87 ATC 4541; 18 ATR 957 (McDonald's case); Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps' case); Case X48 90 ATC 384; (1990) 21 ATR 3389).

The issue of whether individuals are carrying on a business of letting property has been considered in several cases, some of which are discussed below.

In Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202 (Cripps case), the taxpayer and his wife purchased, as joint tenants, 14 townhouses which they rented out. They also purchased a property which was used initially as a holiday home but was later periodically rented out. A further property was purchased for residential purposes. After a failed attempt to sell it, it was also rented out. The Administrative Appeals Tribunal found that the taxpayer and his wife were mere passive investors and were not in the business of deriving income from rental properties. They rejected the taxpayer's argument that he had greater involvement with his 16 properties. The Tribunal also made the following observation about Taxation Ruling IT 2423:

The Applicant asked me to note in particular paragraph 5 of Taxation Ruling IT 2423 (a non-binding ruling) which is referred to in clause 17 of TR 93/32 to the effect that: ''... if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business''.

Paragraph 5 of IT 2423 suggests only that a number of properties may indicate the presence of a business; it follows of course that it will not of itself be determinative.

In 11 CTBR (OS) Case 24 (Case 24), the taxpayer's income included rents from three properties. The taxpayer employed a manager and an accountant - he was principally a letting clerk with authority to refuse tenants. He collected and banked rents, attended to repairs and supervised them, and controlled the caretaker and cleaners. He kept books in connection with rents and repairs, and rates and other outgoings. The taxpayer said he personally carried out the principal part of the management of his rent-producing properties and directed policy, attended to the financial arrangements and made decisions regarding repairs. The taxpayer claimed that he was carrying on a business. In holding that he was not carrying on a business, a majority of the members of the Board of Review said:

It is obvious that some measure of supervision and management must ordinarily be exercised by a property owner who lets offices, &c., and if that does not amount to the carrying on of a business, the fact that he employs others to assist him, either in the letting of the properties or in the preparation of the accounts relating to his rents and outgoings, will not make any difference. For the foregoing reasons we are unable to uphold the claim that the taxpayer is engaged in a 'business as property owner'....

In 15 CTBR (OS) Case 26, (Case 26) the taxpayer derived income substantially from her joint ownership of a block of flats (containing 22 living units) with her sister-in-law. A swimming pool was shared with a neighbouring block of flats owned by the taxpayer's husband and his brother. A garden was maintained and a staff of one caretaker and one cleaner employed on both buildings with casual labour as required. The building was erected and financed by F & Co., the husbands of the joint owners, in the course of their business as building contractors. The general supervision of letting, rent collecting, servicing and maintenance was carried out by the owners or by F & Co. on their behalf. No charge was made by F & Co. for the extensive assistance given in the supervision of the flats. It was held that a business was not being carried on by the owners of the block of flats.

On the other hand, Case G10 75 ATC 33 (Case G10), the taxpayer owned two properties of which six units were let as holiday flats for short term rental. The taxpayer, with assistance from his wife, managed and maintained the flats. Services included providing furniture, blankets, crockery, cutlery, pots and pans, hiring linen and laundering of blankets and bedspreads. The taxpayer also showed visiting inquirers over the premises, attended to the cleaning of the flats daily, mowing and trimming of lawns, and various other repairs and maintenance. The taxpayer's task in managing the flats was a seven day a week activity. The Board of Review held that the activity constituted the carrying on of a business. In reaching that conclusion, the Board found:

It was clearly established in evidence that the money received by the taxpayer from the occupants of the flats was not solely a payment for the right to rent a flat for a certain period.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

·         whether the activity has a significant commercial purpose or character

·         whether the taxpayer has more than just an intention to engage in business

·         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

·         whether there is regularity and repetition of the activity

·         whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

·         whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

·         the size, scale and permanency of the activity, and

·         whether the activity is better described as a hobby, a form of recreation or sporting activity.

These factors are framed in TR 97/11 to reflect that the alternate outcome is as described in the final dot point. The analysis in your case must reflect that the alternate outcome would be to conclude that your activities are an investment.

TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

Applying the relevant cases and indicators to your situation

In many instances, it is obvious that an activity is being carried on as a business and no further investigation is required. Where it is less obvious, regard must be had for any other potential outcome when determining whether a particular activity should be considered to constitute a business and in determining the tests to be applied in reaching such a determination.

In your situation, the potential alternate outcome to carrying on a business is that the activity constitutes an investment and not a hobby. Both business and investment generate assessable income, therefore the analysis needs to be undertaken.

Each case is based on the facts relevant to that specific situation and the conclusion about whether an activity constitutes a business is a conclusion of fact. Each case in unique.

We have made following observations when determining whether you are carrying on a business in relation to your short-term accommodation activities during the 2018-19 income year.

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

You purchased the Property for $XXX,000.00 which had a land area of less than two hectares, and Dwelling A and Dwelling B located on it which abutted each other. Dwelling B had been used by the previous owner for holiday accommodation and you commenced using Dwelling B for that purpose shortly after you purchased the Property.

The Property is the only property that you are currently using for short-term accommodation and could be described as a lifestyle property/hobby farm on which you live in Dwelling A with area available for the running of a less than a commercial number of stock/animals, and Dwelling B that you use for short-term accommodation.

The Property is advertised on several platforms and websites and you have your own website that you use for advertising the Property. You also use Facebook to promote the Property.

Your case can be distinguished from Cripp's case as in that case the scale, being 16 townhouses, was far greater than in your one property. Even though 16 townhouses were rented the AAT found that the taxpayers were mere passive investors and not in the business of deriving income from rental properties.

Similarly, in Case 26, despite the scale of operations of 22 units, the AAT found a business was not being carried on by the owners of the block of flats. Again, the quantity of rental units is far in excess of your one property.

Your activities can also be distinguished from those in Case G10 who operated two properties with a total of six units. As outlined above, the scale of operations refers to the number of properties, rather than the frequency of tenancy.

It is estimated that the market value of the Property is $XXX,XXX.00. You recorded amounts in relation to your activities in the rental labels and your assessments and while you made net tax profits on your short-term accommodation activities, the net tax return for your short-term accommodation is not viewed as being a commercial, or businesslike, return on the funds that you have invested in this activity.

Most of the expenses recorded in your assessments in relation to the short-term accommodation activities are the traditional ownership expenses that would be incurred by any landlord and/or property investor.

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer.

Both business and investment will have a profit-making intention whereas a hobby will not. In general terms, a business activity will be seeking to more efficiently allocate resources than a mere investment and will seek to conduct the activity in a way that provides a return that is higher than the investment levels received by others conducting similar activities. A business may seek to adapt to changing circumstances by altering the form or nature of the allocation of those resources. A business may be more open to taking risks to pursue these outcomes.

You have owned the Property for a significant period and have used Dwelling B to earn income from the time you purchased the Property. The Property is a lifestyle property from which you have received low rental income in relation to the letting of Dwelling B.

Based on the information provided, we have insufficient information to support that you had not taken a longer-term view in relation to the Property, and that you have held the Property since it was purchased not for the sole purpose of earning rental income, but to enjoy the rural lifestyle the Property enabled you to experience and earn a low level of rental income.

Nothing has been provided to support that you are undertaking any activities in relation to the rental of Dwelling B to earn a higher business-like return with the gross rental amounts received in each income year being consistent with investment level returns.

The carrying on of a business is not merely a matter of intention alone. Rather, it is a matter of activity motivated by intention. It is appropriate to look objectively at the activity (including when it started) to reach conclusions about a taxpayer's state of mind in deciding to conduct the activity.

You have used the Property in the current manner since it was purchased. As outlined above, while you have made net tax profits on the activities, they are at investment levels when compared with the capital you invested to purchase the Property, and the estimated market value of the Property.

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. With regards to letting of properties, repetition and regularity may be measured by factors such as regularity of maintenance, collecting of rent, management and advertising of the properties, insurance, dealing with tenancy agreements and inspection reports.

Given the activities of other property owners who are carrying on a business conducting short-term accommodation activities it could not be concluded the level of repetition and regularity of your activity is the same, such as in Case G10.

We are looking at those activities that would be required in the renting of properties. If there were several units rented on a short time basis there is an extensive amount of work conducted daily in meeting tenants, providing cleaning, linen and other services. The fees paid by the tenants are for both the services and the use of the property and if it is of sufficient scale, because of the regularity of these services it can be argued that they could be carrying on a business of renting properties, as was determined in Case G10.

However, the level of repetition and regularity of your activities is not as great as that noted in the cases provided above, nor you do not have the size of the accommodation activities provided in those cases.

It is essential that to be carrying on a business you must do more than just let out the property and not merely receive income from the letting of the property.

While you hire linen and towels for an additional charge, the number of times this occurred during the ruling period is not viewed as sufficient to change the view that the majority of the income is received from providing the fully furnished dwelling, therefore from the letting of Dwelling B.

In this case additional services are not provided for the visitors, such as providing meals, and no separate cost is charged for cleaning as those costs are inclusive in the costs charged to visitors. Additionally, the cleaning of Dwelling B occurs when the visitors have left with no services provided during stays for additional costs.

While the services provided in relation to Dwelling B and the Property may require some effort or attention by you, or other parties, the services provided are not considered significant in terms of warranting payment additional to that paid by the visitors for their stay. Additionally, most of the activities undertaken are in relation to the ensuring that the Dwelling B and the Property are in readiness for the arrival and stay of the visitors which supports that they are services to the property and not to the visitors.

You charge the visitors for their stay based on the length of their stay and although the activities you undertake in relation to Dwelling B may have been conducted in a systematic and organised manner, repetition or regularity by itself does not lead to a conclusion that the activities amounts to carrying on a business.

You have undertaken improvements on Dwelling B since you purchased the Property in addition to making improvements to Dwelling A. However, it is a rare business that does not seek to maximise its revenue by maintaining its assets to an acceptable standard, and while not decisive, it is relevant. But in doing that, it does not mean that they have conducted their activities in owning and managing the properties in a manner that is business-like. It would also be reasonable for an investor to renovate their rental properties to earn higher rental income and/or appeal to a different tenant market.

It would also be reasonable to expect any property owner, either an investor or carrying on a business, to ensure that their properties are in a fit and suitable condition to be rented out. Additionally, as would occur with a general house owner, it would be reasonable to expect that updates and improvements would be made to a property due to usage over time.

The overall impression is that you are not carrying on a business of short-term rental. The income is derived predominantly from the letting of the fully furnished self-contained dwelling and not from activities or services provided in relation to renting Dwelling B out.

If a taxpayer carries out their activity in a manner like other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristics of ordinary trading in that line of business (IR Commissioners v. Livingston 11 TC 538).

This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists.

Generally, where the property owners grant exclusive possession of the property to the residents the relationship between the two parties is one of tenant and landlord, and the activity is more likely to be passive investment rather than a business. Similarly, activities constituting the mere maintenance of an asset and the mere collection of income do not indicate the existence of a business of renting premises.

Your activity in renting out Dwelling B is the renting of a residential property at market rates. The visitors have exclusive use of Dwelling B and you do not enter it unless you are invited or there is an issue at Dwelling B that needs to be rectified. This is like many other rental property owners who hold their properties as investments. Hence the relationship in respect of this test is indicative of a landlord and tenant.

You have landlord and home and contents insurance for the Property, with full disclosure to the insurer that it is used for holiday rental. It would be reasonable to expect property investors using their properties for holiday rentals to insure their properties with a similar type of insurance policy.

The Property is registered with the Council as a hostel for its purposes. However, that does not determine whether your use of the Property and Dwelling B are viewed to be the carrying on of a business of providing short-term accommodation for income tax purposes.

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

However, it is also reasonable to expect anyone investing in rental properties, including passive investors, to keep records in relation to their rental property/ies so that they can keep informed as to whether or not they are making a profit in relation to the rental property/ies and to make decisions as to what activities to undertake in relation to their rental properties to maximise their returns.

You keep an online booking calendar and use a web app to invoice bookings. You also receive reports from the various platforms in relation to the visitor's bookings.

It may be arguable that rental property businesses might keep more detailed records than mere investments so that they can be better positioned to take advantage of opportunities that arise. This test is more relevant when the potential alternate outcome is that the activity constitutes a hobby. Your activities do not have the nature of a hobby.

You live at the Property and you manage Dwelling B. Many of your activities are considered like anyone owning a rental property. While you inspect and clean Dwelling B after the visitors have left, it is viewed that this is simply the monitoring and maintenance of investments from which income is derived. It would be considered normal for any owner of a rental property to inspect it after a tenant/guest/visitor had left the property.

The services provided in relation to Dwelling B as outlined above may require some effort or attention by you, or parties on your behalf. However, the services provided are not considered significant in terms of warranting payment additional to that for the visitors to stay at Dwelling B. While you may provide some services for the visitors, these are small in comparison with the services provided in relation to Dwelling B and the Property.

Given the nature of the Property, it is reasonable to expect that significant time would need to be undertaken to maintain its condition given that it is a life-style property in addition to the animal husbandry requirements regardless of the use of Dwelling B for short-term accommodation purposes and any visitors staying at the Property.

When considering the size and scale of the activity we are looking at the scale in terms of the number of properties and what management input that may be required to conduct the activity.

The business should be large enough to make it commercially viable. In the Cripps Case it was held that the renting of 14 two storey townhouses was not a business. Similarly, in Cases 24 and 26 the renting of 22 units and three properties respectively was also not considered a business.

You have used part of the Property for the purpose of providing short-term accommodation since it was purchased. You do not have any other employment and the income from the letting of Dwelling B is your main source of income apart from some bank interest.

Your short-term accommodation activities do not have the nature of a hobby or recreational pursuit and are like other property owners who are involved holiday letting.

Conclusion

After reviewing the information and documentation provided, taking all of the facts in TR 97/11 into consideration and on weighing the relevant business indicators and objective facts in relation to your situation, we have determined that you are not carrying on a business in relation to your short-term accommodation activities.

Your activities are better described as the renting of Dwelling B to receive income from a stream of rental income. Most of the income is not derived from the services you provide, but from the renting of Dwelling B.

In accordance with the judicial comments above and guidelines set down in Taxation Rulings IT 2423 and TR 97/11, although there is some regularity to activities, your activities lack a significant commercial character, and are not of a size or scale necessary to be characterised as carrying on a business of renting properties.

We acknowledge that there are some elements of your activities that add weight that the activity has a business-like nature such as investment of capital and the length of time the activities have been undertaken. However, they by themselves are not decisive with most of your activities being like those required of a passive investor in rental properties. Accordingly, it is the Commissioner's view that you are a passive investor who uses part of their private property to earn a low stream of rental income.

Therefore, based on the information provided it has been determined that you are not carrying on a business in relation to your short-term accommodation activities in relation to the rental of Dwelling B located on the Property.

Note: Reference has been made in the private ruling application to 'commercial residential accommodation', and if your activities could amount to those undertaken by entities such as hotels, hostels or boarding houses.

The term 'commercial residential accommodation' is used in relation to Goods and Services Tax (GST) and whether a property supplies accommodation in commercial residential premises.

As provided above, when considering whether a business is being provided in relation to the provision of accommodation for income tax purposes, different legislation and ATO views are considered. Therefore, we have not considered any GST implications in relation to your activities.

However, we have considered the nature of your activities and how they differ from the various 'commercial residential accommodation' and provide the following guidance:

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises outlines what are considered to commercial residential premises. It provides guidance on whether activities are the same as those undertaken by hotels, hostels and boarding houses.

Paragraphs 13 to 25 of GSTR 2012/6 discuss the characteristics of hotels, motels and inns which can be distinguished from your activities for the following reasons:

·         Hotels:

-        provide the accommodation at a significant commercial level and nature

-        have the capacity to supply accommodation for multiple occupancies

-        offer meals to guests, usually having a kitchen to prepare meals for guests, and which may have restaurants for guests to dine at

-        linen and towels are usually supplied

-        the rooms are usually cleaned and serviced daily; and

-        guests do not have exclusive occupancy to any part of the premises.

Paragraphs 26 to 35 discuss the characteristics of hostels which can be distinguished from your activities for the following reasons:

·         Hostels:

-        have the capacity to supply accommodation for multiple occupancies

-        may offer accommodation in either a dormitory environment or in separate bedrooms; and

-        meals may be provided.

Paragraphs 36-40 of GSTR 2012/6 discuss the features of a boarding house which can be distinguished from your activities for the following reasons:

·         Boarding houses:

-        meals are provided for guests or residents.

-         the size of the operations are of a commercial level and nature

-         have the capacity to supply accommodation for multiple occupancies; and.

-         can offer accommodation as the occupant's principal place of residence.

Example 3 at paragraphs 51 and 52 of the GSTR 2012/6 relates to an individual who lives in a house in which two furnished bedrooms are available for accommodation. Linen is provided, but no meals or other services are provided to the occupants. The accommodation does not have the characteristics of a hotel, motel, inn, hostel or boarding house and is not viewed as commercial residential premises. The activities being undertaken are not of a significant commercial nature.

Example 4 at paragraphs 53 to 55 in GSTR 2012/6 relates to a farm stay example in which it is considered that the supply of accommodation was a taxable supply of accommodation in commercial resident premises. However, your activities can be distinguished from those being undertaken in the example for the following reasons:

·         Bed and breakfast is provided, however you do not provide meals

·         The suites are cleaned daily, while in your situation Dwelling B is cleaned after the visitors stay has ended

·         The premises provide accommodation for multiple occupants in four separate suites. Dwelling B is booked to one party at a time who have the use of Dwelling B, and it is not available to multiple visitor parties; and

·         The occupants do not have an exclusive right to occupy any particular part of the premises during their stay. As outlined below, it is viewed that the visitors staying at Dwelling B have an exclusive right to occupy Dwelling B during the period of their stay.

Question 2

Summary

It has been determined that you are not carrying on a business in relation to your short-term accommodation activities. Therefore, as the Property is not being used by you in relation to a business that you are carrying on, you have not met a basic condition for the Property to be an active asset.

Additionally, as the main use of the Property is to derive rent it is exempt from being viewed as an active asset.

Detailed reasoning

Active asset

The requirements of an active asset and the active asset test for the small business capital gains tax (CGT) concessions are set out in Subdivision 152-A of the ITAA 1997.

A CGT asset will satisfy the active asset test if:

·         you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the test period; or

·         you owned the asset for less than 15 years and the asset was an active asset of yours for at least half of the test period. (subsection 152-35(1) of the ITAA 1997).

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child or an entity connected with you.

If the asset is not being used in relation to the carrying on of a business the basic condition for the capital gains tax small business concessions will not have been met and the active assets will not need to be considered.

Additionally, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

All uses of the asset are considered when determining the main use of the asset for determining whether it has met the active asset test. However, any personal use or enjoyment of the asset by the taxpayer is disregarded under paragraph 152-40(4A)(a) of the ITAA 1997.

Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? discusses the circumstances in which a premises used in a business of providing accommodation for reward may satisfy the active asset test, notwithstanding the exclusion mentioned above.

TD 2006/78 states:

22. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. The term rent has been described as follows:

● the amount payable by a lessee to a lessor for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003; United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62),

● a tenant's periodical payment to an owner or landlord for the use of land or premises (Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne),

● recompense paid by a tenant to a landlord for the exclusive possession of corporeal hereditaments. The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsburys Laws of England 4^th Edition Reissue, Butterworths, London 1994, Ch 27(1) Landlord and tenant, paragraph 212).

23. A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209). If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

Additionally, at paragraph 25, TD 2006/78 states:

Ultimately, these are questions of fact depending on all the circumstances involved. Relevant factors to consider in determining these questions (in addition to whether the occupier has a right to exclusive possession) include the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Allen v. Aller (1966) 1 NSWR 572), Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Charters [1977] 3 All ER 918).

In strict legal terms, a lease is a contract where one party (the landlord) conveys exclusive possession of some property to another party (the tenant) for a period in exchange for some form of consideration without there being any intention that the tenant will buy the property during or at the end of the period. The consideration is payable to the landlord as owner of the property and not in respect of any other activity undertaken or provided by, or on behalf of the landlord.

In such cases, the landlord would continue to have the obligation to pay ownership expenses in relation to the property and would generally be expected to incur expenses to maintain the property in a state consistent with the requirements of the lease contract or 'fit for purpose'.

Generally, lease contracts would be expected to run for longer periods of time. This contrasts with shorter term contracts where the tenant might only be provided with a right to occupy premises and not exclusive possession. It is significantly more common in shorter term cases that the consideration will then also contain components in respect of specific services provided by the owner such as meals or cleaning.

In Carson & Anor v FC of T [2008] AATA 156, the Administrative Appeals Tribunal (AAT) considered this issue in relation to holiday rentals and stated:

In this matter, the subject asset is one unit, presumably within a group of residential units. Occupants generally stay for one or two weeks. Crockery, cutlery and linen are included but cleaning is done only after the occupants depart. I have no doubt that the occupants regard themselves as having "rented" the unit for the period of their stay and during that stay have exclusive possession. Unsurprisingly, no formal lease agreement is signed but this does not mean that there is no landlord/tenant relationship. On the facts provided, I am of the opinion that the main use of the subject property is to derive rent and, therefore, it is excluded from being an active asset under s 152-40(4) of the Act...

The AAT ruled that the main use of the property was to derive rent and therefore it was excluded from being an active asset. A key factor noted in TD 2006/78 in determining whether the section 152-40(4) of the ITAA 1997 applied was whether the occupier had the right to exclusive possession or only a licence to occupy. Although no formal agreement was signed, there was a landlord/tenant relationship.

The AAT also ruled that the taxpayers' activities had all the earmarks of maintaining and deriving income from an investment rather than carrying on a business. The taxpayers' activities in respect to the property were adjudged to be no more than any investor in real estate would do. They were not the sustained, repetitive, commercial activities representing the carrying on of a business activity.

However, shorter term contracts can also be leases. The issue of whether Airbnb agreements constituted a lease or a license, and whether the Airbnb guests were given 'exclusive possession', were considered in Swan v Uecker [2016] VSC 313 (Swan v Uecker case) where Croft J stated at paragraph 75:

For the preceding reasons, I am of the opinion that the Airbnb Agreement for occupation of the whole of the Apartment is properly to be characterised as a lease between the Respondents, the tenants, and the Airbnb guests for the period of occupation agreed between them.

Justice Croft held that the effect of the agreement, fully analysed, was that the Airbnb visitors enjoyed a right of exclusive possession. While the Airbnb terms and conditions repeatedly used the word 'licence', Justice Croft stressed the well-established principle that the substance of an agreement prevails over its form. He held that the effect of the agreement, fully analysed, was that the Airbnb visitors enjoyed a right of exclusive possession.

Occupation of part only of a dwelling can likewise amount to a lease. See Director of Housing v Janusaukas (Residential Tenancies) [2014] VCAT 42 where the following comments (which were described as 'some useful directions as to what the criteria for the grant of exclusive possession might be' by Emerton J in the subsequent appeal to the Victorian Supreme Court reported as Janusauskas v Director of Housing [2014] VSC 650) were made:

20. The High Court has laid down that the decisive factor in distinguishing a lease from a licence is that of exclusive possession: see Radaich v Smith [1959] HCA 45; (1959) 101 CLR 209. Just as a lease involves the grant of exclusive possession, so the grant of exclusive possession connotes the granting of a lease.

26. Exclusive possession imparts the right to exclude all others, including the grantor. For example, if the right of the grantor to enter onto the property is unlimited as to the purpose, frequency and time of entry, such right will be inconsistent with any claim of the occupant to exclusive possession, which is the point of distinction between and licensee and a tenant; see Nishtom Pty Ltd v Robinsons (Trustee); in the matter of Kinsella (Bankrupt) [2007] FCA 978 (2 July 2007) at 17.

27. It is not necessary in the formation of a lease that the parties intend to create the relationship of landlord and tenant, conversely, a subjective intention to create some other relationship will not be conclusive. What is important is an objective assessment of the leasehold and its grant. This has been most famously put by Lord Templeman by way of analogy (in Street v Mountford [1085] 3 All ER 289 at 294):

The manufacture of a five pronged instrument for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade.

28. One does not therefore look to the intention of the parties but to the rights and duties they have in fact created (Windeyer J in Radaich at 222, approved and applied in Street at 300). In other words, the transaction is something that is real and has an objective existence independently of the intentions, expectations and wishes of the parties, the words they use, and indeed the physical nature of the occupation.

29. A tenancy under the Act need not be in writing (cf s 126 of the Instruments Act 1958 (Vic)) nor is there any requirement that a tenant pay a bond to the landlord, nor that the entire premises be let - a grant of exclusive possession over a single room will still amount to a lease of that room. It is also apparent that a room or rooms may be let empty or furnished, and with or without the grantor's personal possessions.

In Radich v Smith (1959) 101 CLR 209 (Radich case) Windeyer J. stated

A reservation to the landlord, either by contract or statute, of a limited right of entry, as for example to view or repair, is, of course, not inconsistent with a grant of exclusive possession. Subject to such reservations, a tenant for a term or from year to year or for a life or lives can exclude his landlord as well as strangers from the demised premises. All this is long-established law

Although every case will turn on its facts, the Court's decisions clearly establish a general principle that a short-term stay can be a lease, despite the parties not subjectively regarding themselves as a 'landlord' and 'tenant'.

Applying the relevant cases and indicators to your situation

Where there is a question of whether the amount paid constitutes rent, a key factor to consider is whether the occupier has a right to exclusive possession of the property. If such a right exists, the payments involved are likely to be rent. Conversely, if the arrangement allows the occupier only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

Other relevant factors include the degree of control retained by the owner, the extent of any services performed by the owner, such as room cleaning, provision of meals, supply of linen and shared amenities, and the length of the arrangement.

As outlined above, if premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises will not be an active asset.

In your situation, Dwelling B is advertised on your website and the platforms as being a tranquil self-contained multiple-bedroomed farm style holiday accommodation. Based on how Dwelling B is promoted on your website and platform/s, we consider that visitors who stayed at Dwelling B would believe they had exclusive possession of Dwelling B for the duration of their stay, having a private stay in the self-contained dwelling.

Neither you, nor anyone on your behalf, enters Dwelling B unless it was at the request or express permission of the visitors. The visitors would only expect to see you or someone acting on your behalf if they rang/contacted you in relation to a maintenance issue or required something.

Nothing has been provided to support that you, or anyone on your behalf, could enter any of Dwelling B without the visitor's consent/permission if they were complying with the terms and conditions in relation to their stays. This is the same control that a property owner would have in a landlord and tenant relationship.

It is viewed that an offer is made when Dwelling B is advertised, with the offer being accepted when the visitors book their stay at Dwelling B. Hence a contract arrangement is in place.

While you use various platforms, when applying the principles from the Swan V Uecker case to the short-term accommodation activities we consider that the relationship between you and the visitors is more properly characterised as that of landlord and tenant. The terminology used in the platform's terms and conditions does not change the relationship between you and the visitors, and that the arrangement is that of a lease.

The visitors are provided with keys to Dwelling B on their arrival which would suggest that they could enter and leave Dwelling B as they pleased during their stay. The visitors had entered into an arrangement to use Dwelling B and not to share it with you, or anyone else which supports that the visitors had exclusive possession of Dwelling B during their stay.

As outlined in the Radich case, the fact that you or persons on your behalf could enter Dwelling B to undertake repairs/maintenance does not change that the visitors had been granted exclusive possession to Dwelling B. It is therefore viewed that the visitors had a right to the use, in addition to exclusive possession, of Dwelling B during their stays.

While the occupancy granted to the visitors were for relatively short periods, the occupancy is not the same as those for a motel, hotel or bed and breakfast guests as the level of services provided for those guests is higher than the services you provide the visitors, such as the provision of meals.

The possession of Dwelling B by the visitors are viewed as being the same as what would be expected of in relation to tenants of residential accommodation generally, such as the rental of fully furnished properties. Therefore, as the relationship between you and the visitors is viewed as that of a landlord and tenant, then the main use of Dwelling B for short-term accommodation is to derive rent.

It cannot be viewed that the main use of Dwelling B to earn rent was only of a temporary nature given that it has been undertaken since you purchased the Property. Therefore, disregarding your personal use of the Property it is viewed that the main use of the Property was to earn rental income.

Conclusion

As outlined above, it has been determined that you are not carrying on a business in relation to your short-term accommodation activities. Additionally, as the income earned in relation to the short-term accommodation activities is viewed as being rental income, which is the main use of the Property and is not temporary after discounting your personal use of the Property.

Therefore, the Property is not an active asset for the purposes of the small business CGT concessions.